The 29-year-old becomes second England player to turn down a red-ball contract in the last week following Adil Rashid, who signed a similar contract with Yorkshire.
Hales' last Test appearance for England came way back in 2016 and his decision to not play in the County Championship will dampen his chances of reviving his career in the longer format, though, he still remains a vital cog in England's limited overs format.
"I'm grateful to the club for extending my deal with them because I love batting at Trent Bridge - it's my favourite place to play," said Hales.
"It was a fantastic year for the Notts Outlaws last year and I believe we can have more success in the future with the players we have at our disposal."
Earlier, David Willey reckoned that more players might head Rashid's way considering the number of games being played these days and head coach Trevor Bayliss suggested to terminate Twenty20 games from international cricket outside of the World Cup.
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